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Here's Why You Should Hold on to Illumina (ILMN) Stock for Now

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Illumina, Inc. (ILMN - Free Report) has been gaining from robust segmental growth and increased demand for its products. The company’s focus on partnerships and worldwide expansion to drive growth are expected to contribute further. However, stiff competitive and a tough funding environment remain concerns.

Over the past three months, the Zacks Rank #3 (Hold) stock has outperformed its industry. The stock has gained 15.8% compared with 6.2% growth of the industry and 11.4% fall of the S&P 500.

The renowned life sciences company providing tools and integrated systems for analysis of genetic variation and function has a market capitalization of $50.36 billion. The company projects 11% growth for the next five years and expects to maintain strong segmental performance. Further, it has a positive earnings surprise of 19.3%, on average, for the trailing four quarters.


 

Let’s delve deeper.

Strong Q1 Results: Illumina’s better-than-expected results in first-quarter of 2020 buoy optimism. The year-over-year improvement in revenues was driven by strength in sequencing consumables, and sequencing services and other sub-segments.

Further, Illumina's NovaSeq pull-through per system witnessed year-over-year growth within the company’s expectations.

Robust Demand for Products: We are upbeat about Illumina’s production scale, which got a major boost as it scaled up production to support customer needs during the pandemic. This included the installation of iSeq and MiSeq systems since January at one of the Centers for Disease Control and Prevention (CDCs) in the hardest hit region. This was accompanied by supporting other CDC locations and hospitals across the country.

Illumina also launched the SARS-CoV-2 Data Toolkit in April which will make it easier to detect and identify the virus causing the coronavirus disease.

Strategic Partnerships: We are optimistic about Illumina’s expansion strategy. It partnered with IDbyDNA in March with the aim of co-marketing IDbyDNA’s Explify Platform for use with Illumina’s NGS systems and library preparation to provide a complete and streamlined workflow solution for infectious disease applications.

Further, Illumina’s partnership with QIAGEN is aimed at expanding the accessibility and use of NGS-based IVD kits, including companion diagnostics, for better patient management. The company’s collaboration with Adaptive Biotechnologies Corporation will enable clinicians to carry out clinical immunodiagnostic testing, which can be conducted in local laboratories.

Downsides

Stiff Competition: Illumina faces tough competition in the sequencing, SNP genotyping, gene expression and molecular diagnostics markets with several biggies already enjoying significant market share, intellectual property portfolios and favorable regulatory developments. Such companies include Agilent Technologies and Pacific Biosciences of California. To gain a competitive edge, Illumina must upgrade its organization and infrastructure appropriately and develop products with superior throughput, cost, and accuracy.

Tough Funding Environment: Illumina’s exposure to the U.S. government funding was less than 30% in 2015.  Budgetary pressures may result in reduced allocations to government agencies that fund research and development activities. Any shift from the funding of life sciences research and development or delays surrounding the approval of government budget proposals may cause Illumina's customers to delay or forego purchases of its products.

Estimate Trend

Illumina has been witnessing a negative estimate revision trend for 2020. Over the past 30 days, the Zacks Consensus Estimate for its earnings has moved 1.3% south to $6.25.

The Zacks Consensus Estimate for second-quarter 2020 revenues is pegged at $674.2 million, suggesting a 19.6% fall from the year-ago reported number.

Key Picks

Some better-ranked stocks from the broader medical space are Aphria Inc. (APHA - Free Report) , Surmodics, Inc. (SRDX - Free Report) and Owens Minor, Inc. (OMI - Free Report) .

Aphria’s long-term earnings growth rate is estimated at 24.6%. It currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Surmodics’ long-term earnings growth rate is projected at 10%. The company presently sports a Zacks Rank #1.

Owens Minor’s long-term earnings growth rate is estimated at 8.3%. It currently carries a Zacks Rank #2.

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